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British inflation steady as QE debate continues

BOE’s Miles: Two-sided policy risks ahead for central bank

By

WilliamL. Watts

LONDON (MarketWatch) — British consumer prices were steady in September, government data showed Tuesday, doing little to clarify whether the Bank of England will undertake another round of quantitative easing to boost a slowing economy.

The Office for National Statistics said consumer prices saw no change between August and September. Compared to September 2009, prices were up 3.1%, unchanged from the annual change seen in August. The data were in line with market expectations.

The British pound
GBPUSD, -0.0149%
initially posted little reaction to the data but later extended a loss versus a broadly rebounding U.S. dollar to trade at $1.5820, a decline of 0.3% on the day. The euro fell 0.2% versus sterling to change hands at 87.18 pence.

The annual rate of inflation remains more than a full percentage point above the Bank of England’s 2% target.

Expectations have risen recently that the central bank could resume asset purchases as part of its quantitative easing.

“It is clear that if the Bank of England does act in the near term it will be to revive quantitative easing,” said Howard Archer, chief U.K. and European economist at IHS Global Insight. “If, and when, the Bank of England chooses to revive quantitative easing will depend critically on just how much growth slows over the coming weeks and months, and how tight credit conditions remain.”

The Bank of England’s Monetary Policy Committee last week voted to hold its key lending rate at a record low 0.5% and left its asset-purchase program on pause at 200 billion pounds ($317.7 billion).

Minutes of the MPC meeting will be released on Oct. 20. Many economists expect the minutes to reveal a three-way split on the nine-member panel, with MPC member Adam Posen voting to restart asset purchases and Andrew Sentance calling again for a quarter-point hike in the lending rate.

Slowdown in growth

Earlier Tuesday, the British Chamber of Commerce said its latest quarterly economic survey pointed to a significant slowdown in growth in the third quarter and urged the Bank of England to undertake further easing.

While a double-dip recession can be avoided, risks of a setback will likely remain serious “for a considerable time,” making it essential that the central bank hold interest rates at very low levels for an extended period, said BCC chief economist David Kern.

“But this is not enough,” he said. “The MPC should seriously consider increasing the quantitative easing program to £250 billion before the end of 2010, to enhance the economy’s ability to cope.”

Meanwhile, MPC member David Miles said the panel would likely find itself berated four or five years from now regardless of which path it chooses in the next year.

“If we tighten too quickly, it will be the story of ‘myopic MPC learned nothing from events of 2008,’” Miles said in a speech delivered in Dublin. “If growth and inflation look stronger than I now think is the most likely outcome, it will be ‘MPC completely failed to see what was obvious to nearly everyone -- that inflation was out of control.’”

The only sensible path is to weigh all evidence and balance the risks, said Miles, who also emphasized that the British economy is dealing with the aftermath of an extraordinary downturn.

“These are not normal times, which is why there is a risk that monetary policy is normalized too quickly,” Miles said. “U.K. inflation now sits uncomfortably above the target. But I believe this tells us rather little about the cyclical position of the economy or where inflation will be in the future.”

Simon Hayes, U.K. economist at Barclays Capital, said it was worth noting that Miles didn’t make a case for additional quantitative easing, given that he had in the past voted for larger amounts of asset purchases than the rest of the MPC.

“Our inference is that he probably did not join Adam Posen in voting for more QE [quantitative easing] at the October MPC meeting and that it is far from clear that he would support a shift in the policy stance in November,” Hayes said.

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